MANAGING CREDIT RISK

The basic reason for risking credit...

The IT hardware industry in the country has still not evolved to become
mature. A number of players in the market still have this tendency to make a
fast buck. As a consequence, they don´t check the credentials of resellers they
sell to. All that is generally done is take references. And that is grossly
inadequate. This very practice is unhealthy and does not quite fulfill the
desired objectives. It is imperative that as responsible members of the trade we
should look at checking the financial background.

Proper monitoring is critical

When one takes the credit risk, proper monitoring is extremely important. It
is essential to keep track of the purchases that the party makes. When I say
track the ´purchasing behavior´, it includes three dimensions. First, the
price at which the party is buying because many a time an intending defaulter
buys at a price higher than the prevailing market price.

Second, the kind of products that are being bought because an intended
defaulter will deal largely in fast moving goods. And, third, one should find
out whether the party is requesting for products that a sub-distributor does not
deal in. It is here that the vendors can help by providing information about the
SKUs being bought. This I say because of the extensive online tracking
mechanisms they have.

Streamline trade transactions...

It is high time that the trade gets streamlined and it is the vendors´
responsibility to play a proactive role to ensure that. The vendors, for
instance, can help to create a common platform for the free flow of information
among all members of this community. Moreover, vendors should help craft certain
ground rules of doing business. It may not sound practical or feasible but deals
should be undertaken only with registered resellers. And such a system can only
come into effect when vendors actively participate and contribute.

Erect barriers to entry...

Today anyone can set up shop and start trading in IT hardware. There is
practically no barrier to entry. And I feel that it is the responsibility of the
vendors to erect these. These will not only help protect the interests of the
trading community, it will also ensure that only serious players continue in the
industry. The situation today is that there are too many partners to fulfill the
demand.

Rationalize margins...

The industry is plagued by the diminishing margins that cannot be even
described as wafer-thin. It has become a rat race and everyone is running
towards a fatter topline. This cannot be a business objective. The objective
should be to earn respectable margins.

Intelligent working capital management...

One has to understand that more often than not the payment defaults that
happen within the reseller community are incidental rather than intentional. The
need of the hour is to build intelligent credit control systems at all levels.

Many times credit defaults originate from the fact that the trader is
over-exposed but has access to only a limited amount of working capital. One has
to clearly understand that it is only trading that leads to credit defaults.
Resellers need to impose a certain amount of self-discipline while conducting
business transactions.

Create a level-playing field...

Monitoring the individual business of each reseller is not a practical
solution to the problem. What is plausible is the creation of a level-playing
field for small and big resellers alike. And this is an exercise that has to be
objectively driven by vendors and distributors together.

Ensure cyclic business...

The only way the industry can be streamlined is to ensure that resellers do
regular and cyclic business and buying of goods should not happen in spurts.
Cyclic business will ensure that over-trading does not happen. When these
multitude of forces become effective, we will automatically see a price
stability in the market. This price stability will further impact the market by
ensuring that no undercutting happens and margins consequently become healthier.
The credit line also then becomes well established.

Broad-basing can help...

A number of issues about credit defaults can be addressed if the industry is
broad-based. Erecting entry barriers may not be a good idea. The risk of credit
defaults is being borne by just a handful of dealers today.

This risk can be hedged if the base is broader. It will also lead to the
influx of fresh capital in the business. This will not only help reduce credit
risk, it will reduce the exposure.

Self-enforcement is essential...

The dynamics of credit and therefore credit risk management are different
between different layers of the value chain. A best practice cannot be
implemented across the board. As we go towards the resellers´ level, the credit
terms and limits tend to be more flexible. So, enforcing a certain amount of
self-discipline is essential.

And, moreover, many times first-hand information about credit defaults is not
available with the vendors. Their intervention here is neither practical nor
solicited. Also, there is no measure or yardstick that can be used by the vendor
to exercise control. The control has to come from self-enforcement of the right
practices by the channel partners. This will definitively have an impact on the
bottomlines too.